News Lanny Breuer and The Untouchables

I recently watched Fronline's "The Untouchables" and was interested to see in the news tonight that one of the federal prosecutors who was questioned in it, Lanny Breuer, had resigned.

"The Untouchables" investigated the question: Why have no top level Wall Street executives been brought to trial by the Department of Justice when, from statements of numerous whistleblowers and Wall Street insiders, they must have known that their firms were deliberately selling billions of dollars worth of toxic assets to unsuspecting investors?

I figured it was like Breuer said and that DoJ never had a good case against any of the high level execs, although the Frontline program did make me wonder. Then I read a few articles that made me wonder even more.

So I decided to start a thread on it here to see what peoples' opinions on this stuff might be.

Staff: Mentor

I recently watched Fronline's "The Untouchables" and was interested to see in the news tonight that one of the federal prosecutors who was questioned in it, Lanny Breuer, had resigned.

I figured it was like Breuer said and that DoJ never had a good case against any of the high level Wall Street execs responsible for the financial crisis. Then I read a few articles that made me wonder. Anybody have an opinion on this stuff?

Please define "top level executive" so we can be clear as to why the executives that were arrested and prosecuted don't count.

In any case, the simple answer is probably that they did nothing illegal!

Also probably some elements of cost/benefit and cronyism, but I think allegations of coverups, collusion and corruption are overblown.

Yeh, anyway it looks like there isn't much interest in the Frontline program. I was just curious to see if anybody here had done any research on this and related stuff and had any well-formed opinions about it.

Yeh, anyway it looks like there isn't much interest in the Frontline program. I was just curious to see if anybody here had done any research on this and related stuff and had any well-formed opinions about it.

I wouldn't call my opinion well-formed, but that's never stopped me from giving it before ;)

In my research I often found that the supposed villains weren’t that villainous and the supposed victims were incompetent losers who it is difficult to feel sorry for.

For instance, consider purchasing a synthetic CDO. There are many stories of poor, betrodden investors being sold “toxic” or “junk” synthetic CDOs by evil middlemen.

However, most of those CDOs are structured using credit default swaps, which are insurance contracts in all but name. So those investors weren’t purchasing anything – they were selling insurance contracts. Unsurprisingly, the people buying the insurance contracts chose to buy them on things they felt needed them. Then when calamity hit, those poor investors who were really insurance salespeople financially collapsed because they weren’t maintaining appropriate reserves (and were often totally ignorant of what risks they sold insurance on). Naturally they blamed the people who purchased their insurance contracts for deceiving them, and it seems the public believed them. (The Goldman/ABACUS deal is an example of this, though the product is more complicated than typical CDOs, sometimes called a “super synthetic CDO”.)

Ultimately the calamity happened because after creating a successful and strong insurance system over the course of two hundred years we decided that some things that are obviously insurance shouldn’t be regulated as such, and the financial system went gangbusters selling them. Add into that the excitement of allowing institutions to borrow short and lend long outside of the reserve system and you have a very special recipe for disaster.

I don’t really see what sending anyone to jail is going accomplish; it certainly isn’t going to prevent anything like this in the future. On the contrary, if a bunch of people are sent to jail and we all feel better about it, we’ll likely be worse off, since the underlying problem will still be there, but some will think it isn’t.

Staff: Mentor

Ok, so I've watched it. It got a little better after the bad starting premise, but not much. To be clear, the title claim was this:

Why Wall Street's leaders have escaped prosecution for any fraud related to the sale of bad mortgages.

That's narrowly worded and accurate -- but different from what the OP describes ("selling of... toxic assets to... investors"). And also different from what is stated in the first minute of the program:

Fraud and potential criminal conduct were at the heart of the financial crisis... Frontline investigates why no wall street executives have gone to jail...

That's not accurate. Bernie Madoff went to prison for fraud. And he's an important counterexample.

As the subtitle of the show accurately states but the first few sentences of the video misrepresents, the program is about one specific type of fraud related to the financial crisis: mortgage fraud. Morgage fraud is, quite simply, knowingly falsifying mortgage paperwork. http://en.wikipedia.org/wiki/Mortgage_fraud

The discussion in the show starts at the bottom because that's where the fraud actually happens. They spend a lot of time discussing it and establishing that thousands of mortgage brokers went to jail for falsifying information on applications. They don't mention if any homebuyers went to jail for it. :uhh:

The investigation follows the chain of responsibility upward: First stop, the underwriter's evaluators. These guys saw things like waitresses reporting $120,000 a year in wages and assumed -- almost certainly correctly -- that many of the applications were fraudulent. But, under pressure to approve everything, they didn't ask questions and approved the applications. The program doesn't comment on if any of the evaluators went to jail for their complicity in the fraud, but I suspect the answer is none did, since the only specific mention is of the brokers going to jail. See, the problem is that the evaluators don't necessarily see the actual fraud, they just see the statistical result of it. Using the example of the rich waitress, the evaluator conceded that in Vegas it is possible for a waitress to make $120k, so while it is likely that some were fraudulent, unless you see the W-2 (or worse if the tips were unclaimed), you can't know for sure that any specific application was fraudulent. That's the disconnect that insulates them.

The program follows several more levels and includes whistle-blowers who told their superiors of the statistical likelihood that fraudulent mortgages were being approved. But that's the problem: ignoring a statistical likelihood is not fraud. Negligence, certainly. If the evaluators weren't jailed for approving mortgages that they believed but had no proof were fraudulent, how can the executives go to jail for being even further from the fraud and knowing even less?

It isn't credible to believe that there were good odds of successful prosecution of executives because there is no clear evidence of crimes.

That brings us back to Bernie Madoff. Why was Madoff prosecuted successfully? Madoff owned a small (but extremely rich) company and was The guy falsifying the numbers on the balance sheets. That's the difference between him and the other executives. He committed fraud directly. They are accused of looking the other way or tacitly encouraging others to do it. The levels of separation between the crime and the executives makes it tough to prove they committed any crimes.

One thing the program points out is that the FBI had 240 investigators working on the financial industry recently but about 1000 during the S&L crisis, having most of them diverted to counter-terrorism after 911. Certainly this would have an effect, but one would have to believe that they would have found something if there was anything to find.

It does seem virtually impossible to establish fraud beyond a reasonable doubt other than in situations like Madoff (Ponzi Scheme) or where there is verifiable falsification of documents (as with mortgage brokers).

Since it seems to continue to be the case that it's also impossible to establish fraud in the absence of actual recordings of executives (or testimony from witnesses) which would (if it's even possible that such evidence might be gotten) clearly and unambiguously indicate willful involvement in practices which put certain firms and institutions at higher risk than the system can possibly tolerate -- and also due to the presence of many intermediate buffers ... another thing I wonder about (and I guess this is a topic for another thread) is how likely is something similar to the financial crisis to happen again?

As to Lanny Breuer's resignation the day after the airing of the Frontline video. It might seem strangely coincidental to some (the idea is that he was under orders to lay off of the heads of the biggest firms involved in the meltdown), But since there's no way to investigate it, then it's just idle speculation.

Those are cases of insider trading, aren't they? Did insider trading cause the global financial meltdown, or was it the slowdown in the funding of CDOs? Or something beyond that, per Locrian's suggestion, which set the stage for very high risk-taking on a global scale?

I'm a newcomer to this, so feel free (anyone) to share your ideas on any of this.

I tend to agree with Locrian that jail sentences are much less important than getting at the root causes of the meltdown, and taking steps to prevent it from ever happening again. Which, to me at this time, looks like it might be impossible to do.

I've come to the conclusion that the questions the thread posed in the OP are unanswerable. Unless somebody has some actual evidence, which doesn't seem to be the case.

As for holding major players in certain firms responsible, well, suppose they had full knowledge of what their firms were doing, and had full knowledge that what their firms were doing could likely contribute to a global scale financial catastrophe. They did nothing illegal by not being forthcoming with that information, did they?

Staff: Mentor

As for holding major players in certain firms responsible, well, suppose they had full knowledge of what their firms were doing, and had full knowledge that what their firms were doing could likely contribute to a global scale financial catastrophe.

Yes: They aren't stupid. They had to know that what was happening below them - what they were encouraging to happen - was illegal. And they knew that due to their size, a collapse of a major company could have disastrous consequences like a 1929 style run on the banks. They were reckless. But:

They also certainly knew that the government would step in to bail them out if a collapse became imminent (See the SNL crisis: the investments were insured by the government, which encouraged the SNLs to take stupid risks with the money).

They did nothing illegal by not being forthcoming with that information, did they?

Not sure. Falsifying records is fraud at any level, but if no one is looking over your shoulder, there's no need to do it. People are greedy and short-sighted, even if they are rich bankers, so IMO what is needed is smart regulations that protect people against their own greed/stupidity. Requiring mortgage companies to do a better job with their due diligence, and providing government oversight, for example. Violations of procedures like that wouldn't be as sexy as fraud, but could still result in people losing licenses, for example. But there's a problem with that: the government was encouraging the 'give anyone who wants one a loan' attitude too.

Those are cases of insider trading, aren't they? Did insider trading cause the global financial meltdown, or was it the slowdown in the funding of CDOs? Or something beyond that, per Locrian's suggestion, which set the stage for very high risk-taking on a global scale?

I'm a newcomer to this, so feel free (anyone) to share your ideas on any of this.

I tend to agree with Locrian that jail sentences are much less important than getting at the root causes of the meltdown, and taking steps to prevent it from ever happening again. Which, to me at this time, looks like it might be impossible to do.

The cause of the financial panic is a separate, if important, issue. The thesis of the OP's video is that Wall Street financiers are "Untouchable" because of federal connections or political implications. I think the observation that highly placed WS types go to jail frequently for any type of federal securities crime refutes that thesis.

The cause of the financial panic is a separate, if important, issue. The thesis of the OP's video is that Wall Street financiers are "Untouchable" because of federal connections or political implications. I think the observation that highly placed WS types go to jail frequently for any type of federal securities crime refutes that thesis.

I was focused more on the financial panic, but yes I understand that the prosecutions you listed do refute the thesis that WS financiers are "untouchables" because of their political connections.

They also certainly knew that the government would step in to bail them out if a collapse became imminent (See the SNL crisis: the investments were insured by the government, which encouraged the SNLs to take stupid risks with the money). Not sure. Falsifying records is fraud at any level, but if no one is looking over your shoulder, there's no need to do it. People are greedy and short-sighted, even if they are rich bankers, so IMO what is needed is smart regulations that protect people against their own greed/stupidity. Requiring mortgage companies to do a better job with their due diligence, and providing government oversight, for example. Violations of procedures like that wouldn't be as sexy as fraud, but could still result in people losing licenses, for example. But there's a problem with that: the government was encouraging the 'give anyone who wants one a loan' attitude too.

The financial crisis seems to come back to the government not overseeing things sufficiently or in the right way. Doesn't Dodd-Frank increase the accountability of mortgage brokers and banks? Does it do anything to prevent leveraging problems? As for the "too big to fail" scenario that set the stage for both the expectation, in part, of getting bailed out, and the actual bailouts ... has that changed significantly? My understanding is that JPMorgan, Goldman Sachs, Citigroup, and Bank of America (others ?) are still effectively insured (by taxpayer money) against failure (due to, eg., risky practices). Is it that it's in some way beneficial to have a certain number of institutions that are too big to fail? (This is actually stuff for another thread, but this thread could be closed out with a few comments on these and connected questions.)

In the meantime there is money to be made from this disaster and it involves some of the same people who caused the crash in the first place. I wonder if this will turn out to be derivatives round 2.

Apparently, though, on Wall Street that common wisdom about home prices is not held by all, or even many. In the past six months or so, a number of investment firms, hedge funds, private equity partnerships and real estate investors have turned into voracious buyers of single-family homes. And not just any homes, but foreclosures. Investment banks, who also want in on the action, are lining up financing options to keep the purchases going.

Former Goldman Sachs Group Inc. (GS.N) executive Donald Mullen, one of the architects of the subprime mortgage trade, is trying to raise at least $500 million for a fund that will buy foreclosed homes with an eye toward renting them out.